Shrink-Wraps: Who Should Bear the Cost of Communicating Mass-Market Contract Terms?

Abstract:     
The paper examines the equilibrium quality of mass market contract terms, such as those in end user license agreements, when consumers can read and search for a better set of terms. Firms compete over price and quality of the terms. They can also choose to disclose (speak) the terms to consumers at cost. While all consumers must incur positive search (reading) cost to understand the terms, not everyone cares about the terms equally and they can also buy without reading. The paper examines two legal regimes: one that imposes a duty to read on the consumers and the other that imposes a duty to speak (disclose) on the firms. While neither regime strictly dominates the other in terms of social welfare, the paper shows that (1) as the reading or speaking cost converges to zero, the social welfare continuously converges to the first best; (2) consumers will have different preferences over duty-to-speak and duty-to-read regimes; and (3) the quality of the terms of non-disclosing firms may be higher. The results are consistent with the current chasm among scholars and courts over mandatory disclosure policy and also with the recent empirical findings.

Keywords: shrink-wraps, EULA, quality search, duty to read, duty to speak

JEL Classifications: D83, K12, L14, L15

Working Paper Series